Finally responding to broad criticism, the IRS has updated its section 382 proposed regulations to provide transition relief, delaying the application of new rules limiting the use of Net Operating Loss (NOL) carryovers and other tax attributes to shelter built-in gains. Specifically, the proposed rules will not be effective until 30 days after being finalized (the Delayed Applicability Date) and will not apply to five types of transactions that were pending before the Delayed Applicability Date. This update responds to concerns that the proposed rules could impose a significant burden if effective when finalized for three reasons: they represent a significant change to existing law under Notice 2003-65; the extent to which the finalized regulations would reflect the proposed regulations is unclear; and taxpayers may be committed to transactions that were bargained for based on expected NOL availability under existing law when the regulations are finalized, thus upsetting those bargains without an opportunity to adjust.

Transition relief applies to ownership changes pursuant to (i) a binding agreement in effect on or before the Delayed Applicability Date and at all times thereafter, (ii) a specific transaction described in a public announcement on or before the Delayed Applicability Date, (iii) a specific transaction described in an SEC filing submitted on or before the Delayed Applicability Date, (iv) an order of a court (or pursuant to a plan confirmed, or a sale approved, by order of a court) in a Title 11 or similar case for taxpayers who were debtors in the case on or before the Delayed Applicability Date, or (v) a transaction described in a private letter ruling request submitted to the IRS on or before the Delayed Applicability Date.

For more details regarding the proposed regulations and their significance, please refer to our prior article, New NOL Limitations Proposed.